Explained: Why Residents Of Sikkim Exempted From Paying Income Tax

Every taxpayer in India must file income tax every year. The Ministry of Finance announces changes in the income tax slab during the country’s annual budget on 1 February. However, Sikkim is the only Indian state exempt from paying income tax.

The Merger Pact

Sikkim, a former kingdom, merged with India on the condition that its old laws and special status would remain intact. Consequently, the small northeastern state followed its own Sikkim Income Tax Manual 1948, governing tax laws since 1975. Under this rule, Sikkim residents did not have to pay taxes to the Centre.

In 2008, the Union Budget repealed Sikkim’s tax laws but exempted the state’s residents from tax by inserting section 10 (26AAA) in the Act. This section protected Sikkim’s special status and the “Sikkimese” as per Article 371(f). The Union government granted income tax exemption to over 94% of Sikkimese people, except for the 500 families who refused to give up their Indian citizenship.

Section 10 (26AAA) exempts the income accrued to Sikkimese individuals in the state or through dividends or interest on securities from elsewhere. Additionally, market regulator SEBI exempted Sikkim residents from the mandatory PAN requirement for investments in the Indian securities market and mutual funds.

The Supreme Court verdict

The Supreme Court of India ruled that the tax exemption in Section 10 (26AAA) should extend to all Sikkimese people, including those who permanently settled in the state before its merger with India in 1975. Previously, the income tax exemption excluded “old Indian settlers” who had settled in Sikkim before 1975. The Supreme Court’s verdict responded to a 2013 petition by the Association of Old Settlers of Sikkim (AOSS), challenging the denial of income tax exemption to these settlers.

The court directed the state to amend the Explanation to Section 10 (26AAA) to extend the tax exemption to all Indian citizens domiciled in Sikkim on or before April 26, 1975. The apex court also struck down the exclusion of Sikkimese women who married non-Sikkimese men after 1 April 2008 from the exempted category, deeming it “ultra vires Articles 14, 15, and 21 of the Constitution of India.”

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